For Israel, 2010 was characterized chiefly by two interrelated developments. Intermittent peace talks with the Palestinians failed to make progress, and Israel’s international standing saw further erosion.

A construction crew works on a site near the West Bank city of Hebron on Oct. 20, 2010, three weeks …

Tara Todras-Whitehill/AP

After a 20-month hiatus, Israel and the Palestinians ostensibly resumed direct negotiations at a White House summit in the U.S. in early September. Prime Minister Benjamin Netanyahu, whose commitment to peacemaking had been questioned, said that he had arrived in Washington to find “an historic compromise”; Palestinian Pres. Mahmoud Abbas spoke about unwavering dedication to a successful outcome; and special U.S. peace envoy George Mitchell said that the two leaders had agreed that “the aim of the negotiations is to resolve all core issues” for a two-state solution—Israel and Palestine living side by side in peace—within a year. To signal wider Arab backing for the process, Egyptian Pres. Hosni Mubarak and Jordan’s King ʿAbdullah also attended the Washington summit, and Mubarak hosted a follow-up conference in Sharm el-Sheik. The Palestinians refused to continue the talks, though, after a 10-month moratorium Netanyahu had imposed on construction in Jewish West Bank settlements was allowed to expire on September 26—just three and a half weeks after the festive launch of the negotiations. To rescue the faltering process, the U.S. offered both parties guarantees of support on more significant issues but failed to achieve a breakthrough.

Under strong U.S. pressure, the Israelis and the Palestinians had begun a tentative process of indirect negotiations in May. But the so-called proximity talks, with Mitchell shuttling between Jerusalem and Ramallah, made little headway. Partly because of a lack of faith in the process, the Palestinians adopted a parallel unilateral strategy. With Palestinian Prime Minister Salam Fayyad talking about “a well-functioning state in just about every facet of activity” by mid-2011, the Palestinians warned that if the talks remained deadlocked, they would take their case to the United Nations and seek international recognition for a Palestinian state along the 1967 borders, with East Jerusalem as its capital, regardless of the Israeli position.

The unflagging U.S. effort to bring about a negotiated solution led at times to serious friction with Israel. For example, after an initial agreement to begin “proximity talks” in early March, U.S. Vice Pres. Joe Biden traveled to the region to announce the breakthrough; talks had broken down in December 2008. During his visit, however, Israeli officials approved plans for the construction of 1,600 housing units in a Jewish neighbourhood of Jerusalem on the Arab side of the 1967 Green Line, sparking a major crisis. The Palestinians retracted their agreement to negotiate, and the U.S. blamed Israel for what it saw as a deliberate slight, calculated to torpedo peace efforts.

Another source of friction arose over the differing approaches to curbing Iranian influence in the region. U.S. Pres. Barack Obama argued that a viable Israeli-Palestinian peace process would make it easier for Arab moderates to support U.S. efforts to stop Iran’s development of nuclear weapons, whereas Netanyahu insisted that unless Iran was defanged first, it would undermine any Israeli-Palestinian peace effort. Netanyahu and Obama seemed to resolve their differences in a crucial meeting on July 6, with Netanyahu having convinced the president that he was ready to make major concessions for peace and Obama having convinced the prime minister of his determination to preempt Iran’s nuclear program.

In late May the U.S. backed the final communiqué of a monthlong Nuclear Non-proliferation Treaty (NPT) Review Conference, calling for a nuclear-free Middle East and for Israel to sign the NPT. In their July meeting, however, Obama assured Netanyahu that the U.S. would maintain its support for Israel’s long-standing policy of nuclear ambiguity, under which it did not confirm or deny possession of nuclear weapons or sign the NPT. Two months later an Egyptian initiative to recruit the International Atomic Energy Agency to demand that Israel sign the NPT was narrowly defeated with U.S. help.

Indeed, despite abiding differences on the peace process, U.S.-Israeli military cooperation was as strong as ever. In early October, Israel signed a $2.75 billion deal for the purchase of 20 F-35 stealth joint strike fighters. A few weeks later the Israeli Defense Forces and the U.S. European Command conducted a major joint exercise testing interoperability of combat systems that might be used in a showdown with Iran.

Faced with a major arms buildup by Iran’s neighbouring proxies, Hezbollah in Lebanon and Hamas in Gaza, Israel reinforced its antimissile and rocket defenses. In January the “Iron Dome” system designed to intercept short-range projectiles passed final tests, and in June Israel launched the Ofek 9 spy satellite, enhancing its capacity for intelligence gathering over Iran.

Israel’s renewed building in the West Bank and its siege of Gaza fueled further erosion of its international standing. This was exacerbated by two major diplomatic setbacks. The use of fraudulent foreign passports by agents who were presumed to be from the Mossad and were involved in the assassination of a senior Hamas official in Dubayy in January sparked a diplomatic row with the U.K., Ireland, Australia, France, and Germany, the countries whose passports had been exploited. Then, in late May, eight Turkish “peace activists” and one U.S. national of Turkish descent were killed on the Mavi Marmara, one of seven vessels in an aid flotilla trying to run Israel’s naval blockade on Gaza. Israeli naval commandos, who had rappelled onto the deck to intercept the ship, found themselves hopelessly outnumbered and opened fire after they were attacked with knives and iron bars. A storm of worldwide protest ensued, forcing the government to set up the first-ever Israeli commission of inquiry with an international presence and to significantly ease its siege on Gaza. The affair further undermined Israel’s already-strained relations with Turkey, once a key regional ally. Since the Israeli attack on Gaza in 2008, Turkish Prime Minister Recep Tayyip Erdogan had grown increasingly hostile to Israel while edging closer to Iran. In late October, Turkey’s National Security Council defined Israel as a “threat” to Turkish interests.

Despite its growing diplomatic isolation, Israel’s economy prospered, with the most dramatic development being the discovery in June of a huge offshore natural gas reserve. Dubbed “Leviathan,” the field was thought to contain about 425 billion cu m (15 trillion cu ft) of natural gas. The Leviathan and other recent finds, which could contain as much as one-fifth of the known gas reserves in the U.S., or twice that of the U.K.’s, were described as a potential “geopolitical game changer.”

In May Israel was admitted to the Organisation for Economic Co-operation and Development, the prestigious organization incorporating the world’s most developed countries. Despite lingering effects of the global economic crisis, Israel’s economic performance was more robust than that of most Western countries, with the Bank of Israel forecasting growth of 4% in 2010, compared with only 0.8% in 2009. Other indicators were also positive: private consumption was up from 1.7% in 2009 to 5.2% in 2010; unemployment dropped from 7.6% to 6.3%; and exports climbed 11.3% after having fallen 10.2% in 2009.

Israel’s economic success came at a heavy social cost, however, as gaps between the rich and poor continued to grow. Figures released by the Central Bureau of Statistics in mid-October showed that income differentials in Israel at the end of 2008 were higher than in any EU country, with the top 20% of earners averaging 7.5 times more in income than the bottom 20%, compared with a corresponding figure of 4.9 in the EU.